1. 1 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Budgetary and Cost Control Chapter 25

2. 2 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Budgeting Is a planning process. Budgetary Control Is the process of regulating the operating budgets of the organization.

3. 3 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Purposes of Budgeting Helps ensure the organization’s operations are performed more efficiently. Helps management maintain the cost- effectiveness of the organization’s operations. Helps the organization better plan for the future.

4. 4 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Advantages of Budgeting (1 of 2) Advantages of Budgeting (1 of 2) 1. It requires adequate management consideration of the organization’s policies. 2. It requires that department-level managers develop practices that facilitate the attain- ment of budgetary goals. 3. It requires that managers identify the resources necessary for accomplishing the organization’s goals.

5. 5 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Advantages of Budgeting (2 of 2) Advantages of Budgeting (2 of 2) 4. It helps management make accurate, timely decisions regarding various organizational operations. 5. It helps management determine which functions are not operating efficiently. 6. It helps management determine which functions are experiencing difficulty in achieving goals and objectives.

6. 6 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Limitations of Budgeting 1. Because budgeting is based on estimates, the validity of the budget is, to a large extent, determined by the accuracy with which the estimates are made. 2. The operating effectiveness of an organization is clearly dependent upon how well management is able to motivate employees to operate within the budgeted allowances. 3. The effectiveness of the budget is, to a large extent, dependent upon the accuracy with which budget revisions are made.

7. 7 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Prerequisites for Successful Budgeting Proper Organization Financial Data Commitment of Top Management

8. 8 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Proper Organization Requires the presence of these characteristics: 1. The proper group of tasks within functions, definitive lines of authority, and areas of responsibility. 2. Definitive lines of authority and areas of responsibility. 3. Lines of communication.

9. 9 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Financial Data Unless needed data are available, the basis for budget development does not exist. Types of financial data needed: 1. Number of units sold during the previous financial period. 2. The relationship between the number of units sold and the cost incurred in producing these units. 3. Emerging financial trends.

10. 10 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Commitment of Top Management For the process to work well, management must be committed to the use of the budget as a control mechanism.

11. 11 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Elements of Budget Preparation Determining the Budget Period Developing the Budget Revising the Budget

12. 12 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Determining the Budget Period Involves determining the length of the period, which generally coincides with the organization’s fiscal period. Length should be sufficiently long to compensate for any seasonal fluctuations.

13. 13 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Developing the Budget Two types of budgets: Departmental Budget Master Budget Is a unit budget. Is a composite of unit budgets.

14. 14 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Responsibility for Budget Preparation Must Be Assigned Responsibility for Budget Preparation Must Be Assigned In larger organizations, it is often the responsibility of the controller or treasurer. In other organizations, it is often the responsibility of the vice president who is concerned with the organization’s financial areas. A budget committee is also involved in many instances.

15. 15 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Types of Office Costs (1 of 2) Types of Office Costs (1 of 2) Fixed Costs Costs that remain constant regardless of the number of units produced. Rent, insurance, and taxes are examples. Variable Costs Costs vary proportionately in relation to the output levels. Materials and supplies are examples.

16. 16 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Types of Office Costs (2 of 2) Types of Office Costs (2 of 2) Semivariable Costs Costs increase as production increases but not in a direct proportion to production increases. Photocopier charges are an example.

17. 17 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Guiding Principles of Budget Preparation 1. Employee participation in budget preparation is advantageous. 2. Budget should reflect realistic estimates of operating costs. 3. Budget must provide for unforeseen circumstances. 4. Employees should feel committed to the budget.

18. 18 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Revising the Budget Is generally required because of uncontrolled or unforeseen circumstances that require the expenditure of the organization’s financial resources. Techniques for Revising the Budget Techniques for Revising the Budget Periodic review Progressive review Moving review

19. 19 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Periodic Review Budget is revised at predetermined times for the remainder of the year. Budget can be reviewed every month, every two months, every quarter, etc.

20. 20 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Progressive Review Uses standard time spans, perhaps 6 months. Involves revising the budget at specified times and for a constant length of time.

21. 21 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Moving Review Budget is revised every month. As one month is completed, the same month for the next year is included in the revision.

22. 22 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Zero-Based Budgeting (1 of 2) Is a budgeting concept that requires the re- evaluation of every program and expenditure each time a year’s budget is prepared.

23. 23 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Zero-Based Budgeting (2 of 2) Involves these steps: 1. Describe each discrete organizational activity in a decision package. 2. Evaluate and rank these decision packages in terms of a cost-benefit analysis. 3. Allocate resources on the basis of need.

24. 24 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Guidelines to Follow When Preparing Budget Reports Guidelines to Follow When Preparing Budget Reports 1. Exception situations should be pointed out. 2. When presenting figures in a report, a comparison base should be given. 3. To assist the reader, information should be summarized whenever possible. 4. When appropriate, reports should include interpretative information. 5. Reports should be standardized as much as possible. Preparing the budget report is a frequent part of budgetary control.

25. 25 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Common Sections of Budget Reports Purpose of the Report Presentation of Financial Data Summary Conclusions Recommendations

26. 26 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Cost Control Is concerned with the expenses incurred in performing various office operations. Is also concerned with keeping expenditures as low as possible.

27. 27 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Objectives of Cost Control 1. To develop standard costs for various office operations. 2. To develop, within the employees, a desire to be cost conscious. 3. To assist in the development of efficient operating procedures. 4. To allocate the costs of operations to the appropriate functions. 5. To identify inefficient operations.

28. 28 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Techniques for Controlling Office Costs Standard Breakdowns Standard Costs Cost Analysis Studies Taking Corrective Action

29. 29 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Cost Breakdowns This technique involves determining what percentage of the total cost of an operation is classified as a salary or a labor cost, for example. Includes Several Categories Salaries Supplies and/or Materials Overhead

30. 30 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Standard Costs This technique involves determining the unit costs of various office operations. Once the unit cost is determined, it can be compared with comparable standard costs.

31. 31 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Cost Analysis Studies This technique involves comparing the cost of a current period’s operations with those of a prior period.

32. 32 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Taking Corrective Action When analysis indicates that corrective action is necessary, those in positions of responsibility must take corrective action.

33. 33 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Areas for Which Office Costs Can and Should Be Controlled Areas for Which Office Costs Can and Should Be Controlled Personnel Supplies and Materials Equipment Work Processes Overhead

34. 34 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Personnel The cost of personnel is likely to be the largest budget item; therefore, personnel costs provide greater flexibility than do other areas.

35. 35 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Supplies and Materials Costs This involves keeping supplies and materials costs to a minimum, minimizing the number of different forms used, and using equipment that facilitates the interchange of supplies.

36. 36 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Equipment Costs This involves purchasing reliable equipment as well as the early trade-off of equipment that has higher-than-average repair charges.

37. 37 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Work Process Costs Special attention should be devoted to developing efficient work processes.

38. 38 Administrative Office Management, 8/e by Zane Quible ©2005 Pearson Education, Inc. Pearson Prentice Hall Upper Saddle River, NJ 07458 Overhead Costs Because some overhead costs are variable, controlling them should be a conscious effort of employees.